How the USA and the European Union weaponized SWIFT against Russia?
DI EDOARDO GRIMALDI
The challenges and crises confronting states in today's interdependent and complex global landscape underscore the pivotal role played by certain global networks, with financial networks assuming particular significance. Since the events of 9/11, the United States has leveraged its central position within these global financial networks unilaterally, employing them as instruments to further its foreign policy objectives and effectively transforming these networks into tools of domination. This article aims to elucidate how the United States, in collaboration with the European Union, strategically weaponized financial interdependence with Russia in the aftermath of the invasion of Ukraine, particularly the exclusion of Russian banks from the financial messaging system, SWIFT.
The term "weaponized interdependence," as conceptualized by Professors Abraham Newman and Henry Farrell, denotes a scenario wherein an actor strategically exploits its position within an embedded network to secure a bargaining advantage over other actors in the system. States wielding political authority over crucial economic nodes can weaponize the networks to either gather information or choke-off the flow of economic and informational exchanges. Newman and Farrell have elucidated how the strategic pursuits of market actors during the era of globalization have inadvertently given rise to highly centralized global networks for exchange. The configuration of certain economic networks inherently fosters an imbalance of power among states due to the asymmetrical nature of network structures. In such instances, specific nodes emerge as more pivotal and interconnected than others, leading to the centralization of exchanges through a limited number of intermediaries, often falling under the political authority of certain states. This centralized structure sets the stage for the potential manifestation of weaponized interdependence.
One indispensable component of the global financial network, essential for the movement of capital between entities, is a secure communication system connecting financial institutions. This critical service has been provided since the 1970s by SWIFT, a cooperative of member-owned financial institutions headquartered in Brussels. SWIFT's primary function is to ensure the secure exchange of data related to all international monetary transactions among participants in the network. A brief examination of the system's origins reveals how the actions of market actors inadvertently created a centralized financial messaging network. In the 1970s, a collaborative effort emerged among European and American banks aiming to establish a shared financial messaging system. This initiative sought to augment the volume of transnational payments while upholding efficiency and reliability, surpassing various competitors. SWIFT ascended to a dominant position in the international payment message transfer market, culminating in 1997 under the monopoly regulation of the European Commission. The regulatory mandate stipulated that SWIFT adopt an open-access model, leading to an increased adoption by financial institutions, ultimately fostering dependence. By 2016, SWIFT extended its reach to more than 200 countries, serving over 11,000 financial institutions and facilitating the transmission of an impressive 6.5 billion messages annually.
From the outset of the 21st century, SWIFT had a central role within global financial networks, enabling states to access international payment systems through its services. In the aftermath of 9/11, the U.S. government recognized the potential of SWIFT as a tool to map the intricate landscape of global finance and to obstruct channels utilized by terrorists. Beyond this, SWIFT emerged as a choke-point from the financial system, given the absence of alternative messaging services with comparable international reach—a reality underscored by instances such as Iran in 2012 and again in 2018. Despite SWIFT's headquarters being situated in Brussels, it remained susceptible to U.S. political and legal pressure due to one of its primary data centers being located in Virginia. Initially resistant to the demands of the U.S. government, SWIFT considered itself solely a technical organization. However, it ultimately acquiesced in the face of potential regulatory repercussions that the U.S. could exert against its administrative board. For a prolonged period, the U.S. government kept its access to SWIFT under wraps, even from its allies. Once this access came to light, European nations didn't oppose it. Instead, they sought permission to actively engage and collect information. The U.S. maintained its ongoing access to SWIFT data, which it later shared with European governments. This cooperation stemmed from the acknowledgment that European entities encountered more obstacles in accessing such data due to their national privacy laws. As a result, European nations found themselves depending on the U.S. to acquire vital financial information.
The prospect of leveraging global financial networks became a strategic tool employed by the United States and the European Union in response to Russia's invasion of Ukraine in 2022, with the aim of compelling Russia to cease hostilities. However, the EU encountered inherent limitations. Several European countries were reliant on Russian gas supplies. Unlike the U.S, the EU lacked domestic institutions comparable to the American Office of Foreign Assets Control (OFAC) for implementing economic sanctions. Sanctions had to gain unanimous approval from EU members and then be implemented by individual national administrations, consequently, American assistance became imperative. Through the mediation facilitated by the European Commission, the U.S. and the EU collaboratively formulated a comprehensive set of sanctions to exclude Russia from global financial networks. This strategic decision included the exclusion of certain Russian banks from accessing the SWIFT system to complicate Moscow's management of the interbank transaction system. Since about half of all worldwide payments are made in dollars, transactions using systems like SWIFT often require intermediary banks. These banks, usually under U.S. oversight, act as go-betweens. However, these banks are cautious about upsetting U.S. authorities by handling payments for entities in sanctioned countries. This caution leads to limited access to foreign currency and prevents the transfer of assets abroad for Russia. While technically feasible, conducting international transactions without SWIFT is costly and complex. The feasibility of implementing such measures was facilitated by the centralized nature of global financial networks, wherein key intermediaries in these financial exchanges fell under European and American political authority, as exemplified in the case of SWIFT.
The collaborative influence of the U.S. and the EU within financial networks has enabled them to impact the Russian economy, leading to a contraction in GDP, a decrease in imports, heightened exchange rate volatility, and reduced foreign investment. While the weaponization of SWIFT may not have dissuaded Russia from pursuing war, it affected the Russian economy. The potential for the United States to unilaterally leverage the structural power embedded in this underground empire, weaponizing it, raises the risk of eroding the foundation of that power in the future. It's crucial to acknowledge that, although there are currently no viable alternatives to SWIFT, various countries, including China and Russia, have endeavored to establish alternative financial messaging systems. In response to threats of exclusion from the SWIFT system after the Crimea invasion in 2014, Russia developed its own internal financial transaction messaging system known as the System for Transfer of Financial Messages. Similarly, China initiated the development of its SWIFT alternative, the Cross-Border Interbank Payment System (CIPS), in 2015. While the adoption of CIPS has been gradual, in 2022 it now connects 1427 financial institutions in 109 countries. However, the success of these alternative networks remains uncertain.
Drezner D., Farrell H., Newman A., “The Uses and Abuses of Weaponized interdependence”, Washington, Brookings Institution Press, 2021.
Farrell H., Newman A., “Underground Empire: How America Weaponized the World Economy”, New York, Henry Holt and co., 2023.